Every year, you go to the doctor’s office and they take different measurements – blood pressure, heartbeat, cholesterol…
The goal of all those measurements is to give you a snapshot of your health and figure out if there are areas you need to improve…hopefully before it becomes an emergency.
But when was the last time you did a “physical” of your financial health?
Understanding key metrics about your finances can help you understand what you need to improve.
After all, awareness is key to change.
I’ve put together a little financial literacy quiz to help you calculate your financial health. Ideally, you should be able to answer these off the top of your head. But if you can’t, that’s fine! Figure out the answer and learn what it says about your financial wellness.
Good luck!
1) Last month, did you spend more or less money than you brought in?
This measures your cash flow – and whether it’s positive or negative.
I don’t think it’ll come as a surprise that you should be spending less than you make every month (i.e., have a positive cash flow).
If you don’t know how much money is coming in and out of your bank account every month, then you need to create a weekly money ritual.
A weekly money ritual is an hour you set aside every week to manage your money.
Spending regular time managing your money is important because it provides financial awareness, helps you set and achieve goals, budget effectively, manage debt, build security, and make the most of your financial opportunities. By actively managing your money, you take control of your financial well-being and increase your chances of achieving financial success.
2) What’s the highest interest rate you’re paying on any debt?
This measures your debt management.
Contrary to popular belief, not all debt is bad!
Bad debt refers to borrowing that does not provide long-term value or may have negative consequences for your financial well-being. Some examples include:
- High-interest credit card debt
- Consumer loans for depreciating assets like luxury goods or expensive gadgets
- Payday loans or predatory lending
Good debt is typically associated with investments or assets that have the potential to increase in value or generate long-term benefits. This can include mortgages, student loans, or business loans.
As long as your debt is being used to pay off things with a long-term benefit, it isn’t necessarily “bad.” But you do want to make sure that you aren’t stuck with a debt that has an interest rate above 7%.
The reason for this is that stocks typically have a return of 8-10%. So, if you’re trying to pay off credit card debt that has a 23% interest rate, there’s no point in investing because you’ll always owe more money than you make in investing. You’ll want to pay off high-interest debt before you start to passively grow your money.
3) What percentage of your investments are in stocks?
This measures your asset allocation.
Asset allocation is the process of dividing an investment portfolio among different asset classes, such as stocks, bonds, cash, and real estate. This is important to achieve diversification and manage risk.
Different asset classes have varying levels of risk and return, so a diversified portfolio can provide higher returns with less risk than a concentrated portfolio.
It’s important to know your asset allocation to make sure you’re balancing an appropriate amount of risk.
You should adjust your asset allocation as you age.
If you’re younger (say, 20s or 30s), you typically want to allocate a larger percentage of your portfolio to stocks, which historically have higher potential for returns but also come with higher volatility and risk. This is because you still have time to ride out the highs and lows of the market.
If you’re older, (say, 40s and up), you may allocate a larger percentage of your portfolio to bonds and cash, which have lower potential returns but also offer more stability and income.
If you want an easy way to ensure well-calculated asset allocation, invest in a target date fund. This will automatically adjust your investment portfolio as you get closer to retirement as you can rest easy knowing that your portfolio is thoughtfully diversified.
Side note – if you want to learn about the secrets of successful investors, you should watch our free masterclass! We give you our signature money management system and tips for building wealth so you can create the life of your dreams.
4) What’s your net wealth (aka net worth)?
Knowing your net wealth gives you a snapshot of your financial health and serves as a comprehensive indicator of your financial well-being.
Understanding your net wealth is crucial for setting meaningful financial goals. Knowing your net wealth helps you assess the feasibility of your goals and create a realistic plan to achieve them. It provides a benchmark against which you can measure your progress and make adjustments as needed.
I know that the idea of calculating your net wealth can be scary…but it’s actually very freeing.
Knowing your net wealth enables effective financial planning, guides wealth-building and asset allocation, aids in debt management, ensures financial security, and serves as a motivating factor in achieving your financial goals. It is a valuable tool for assessing your overall financial health and making informed decisions about your financial future.
The formula for net wealth is Net Wealth = Total Assets - Total Liabilities.
Here's a step-by-step guide to calculating your net worth:
- Determine your assets: Make a comprehensive list of all your assets, including but not limited to:
- Cash and savings accounts
- Investments (stocks, bonds, mutual funds, etc.)
- Retirement accounts (401(k), IRA, etc.)
- Real estate properties (primary residence, rental properties)
- Vehicles
- Valuables (jewelry, art, collectibles)
- Business ownership or partnership
- Other assets (such as the cash value of life insurance policies)
2. Assign a reasonable estimate of the current market value for each asset.
3. Determine your liabilities: Make a list of all your liabilities or debts, including:
- Mortgage loans
- Auto loans
- Student loans
- Credit card debt
- Personal loans
- Other outstanding debts
Note the current outstanding balances for each liability.
4. Calculate your net wealth: Once you have a complete list of your assets and liabilities, subtract the total value of your liabilities from the total value of your assets. The resulting value represents your net wealth.
After calculating your net wealth, take some time to analyze the results. A positive net wealth indicates that your assets exceed your liabilities, suggesting a healthy financial position.
Conversely, a negative net wealth indicates that your liabilities outweigh your assets, which may require attention to improve your financial situation.
Also, track changes over time. It's helpful to track your net wealth regularly to monitor your financial progress. By calculating and comparing your net wealth periodically, you can assess how your financial decisions and investments are impacting your overall financial health.
5) Your car just broke down and it’ll be a $1,200 repair…how will you pay for it?
This measures your cash reserves…and ultimately, your financial security.
Life is full of unexpected expenses. But that doesn’t mean you need to be unprepared.
An emergency fund is a crucial component of financial stability and peace of mind. It is a dedicated savings account designed to provide a financial cushion during unexpected circumstances.
Having an emergency fund is essential for several reasons. It serves as a safety net in times of job loss, medical emergencies, car repairs, or unforeseen expenses.
By having readily available funds, you can avoid going into debt or resorting to high-interest loans.
An emergency fund also provides peace of mind, knowing that you have a financial buffer to handle life's uncertainties.
You should aim for three to six months' worth of living expenses in your emergency fund, ensuring you are prepared for unexpected events and can navigate through challenging times without undue financial stress.
6) What’s the interest rate on your savings account?
Knowing the interest rate on your savings account is important for several reasons:
- Earning potential: The interest rate determines how much money your savings will grow over time.
- Comparison with other options: Understanding the interest rate on your savings account allows you to compare it with other available savings or investment options. You can assess whether your current account offers a competitive rate compared to other banks or financial institutions. This empowers you to make informed decisions about where to keep your money to maximize your returns.
- Financial planning: Knowing the interest rate helps you plan and budget effectively. You can calculate how much interest income you will earn in a given period, which enables you to set realistic savings goals, determine how long it will take to reach those goals, and adjust your saving and spending habits accordingly.
Interest rates may fluctuate based on the current economic environment, the financial institution offering the account, and prevailing market conditions.
That said, the average interest rate on a regular savings account is only .23%, so I suggest you look into high yield saving accounts, which are essentially the same as a typical savings account but offer a much higher interest rate.
How to pick the best high yield savings accounts!
7) How much do you contribute to your retirement accounts every month?
Retirement savings are easy to ignore. When you’re young, you think you have plenty of time to start. When you’re older, you can be distracted by other goals that seem more pressing, like paying down debt or building passive income streams.
But there are several reasons why prioritizing your retirement savings as early as possible is important:
- Harnessing the power of compounding: When you contribute to your savings regularly, something amazing happens called compounding. It means that your money can earn interest not only on the amount you put in but also on the interest it has already earned. The more you contribute and the earlier you start, the longer your money has to grow and multiply. This can lead to impressive growth over time, giving you the chance to reach your financial goals faster. So, by making regular contributions, you harness the power of compounding and set yourself up for long-term success.
The bottom line is that the sooner you start investing, the more your money grows and the less money you have to contribute overall.
2. Meeting long-term financial goals: Regular contributions ensure that you are consistently working towards your retirement goals. By contributing regularly, you are actively building up your retirement savings, inching closer to the desired amount you need for a comfortable retirement. It helps you maintain discipline and stay on track with your financial objectives.
3. Dollar-cost averaging: Regular contributions provide an opportunity to practice dollar-cost averaging. This strategy involves investing a fixed amount of money at regular intervals, regardless of market conditions. By investing consistently, you buy more shares or units when prices are low and fewer when prices are high. Over time, this can help mitigate the impact of short-term market volatility and potentially lead to better long-term investment returns.
4. Taking advantage of employer contributions: If you have a workplace retirement plan, such as a 401(k), contributing regularly is often necessary to maximize your employer's matching contributions. Employer matching is essentially free money added to your retirement savings based on your contributions. Failing to contribute regularly could mean missing out on this valuable benefit.
5. Adapting to changing circumstances: Regular contributions allow you to adapt to changing circumstances, such as changes in income, expenses, and life events. By contributing consistently, you can adjust your savings rate as needed and maintain a steady progress towards your retirement goals, regardless of any short-term fluctuations in your financial situation.
In summary, by making regular contributions, you are actively taking control of your financial future and increasing the likelihood of a secure and comfortable retirement.
If you’ve already paid off your high-interest rate debt and established an emergency fund of at least $1,000, then it’s time to focus on your retirement savings.
If you have an employer who does matching contributions, make sure that you’re contributing the maximum amount your employer will match. If you have an IRA, try to max that out.
Want to Improve Your Financial Wellness and Financial Literacy?
All right, pencils down – this financial literacy quiz is over!
If you didn’t do as well as you’d like, that’s ok! You’re in the right place to get your finances under control.
Go back to the questions you couldn’t answer, get the answers, and figure out what areas you need to work on.
If you want to take your financial wellness to the next level, be sure to check out our free masterclass to help you learn how to invest and build lasting financial security.
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